Stellantis: Free Cash Flow Disaster

Stellantis (NYSE:STLA) is grappling with one of its biggest challenges to date—an unprecedented profit warning dated September 30th that paints a bleak picture for the company’s near future. If you’ve been keeping an eye on Stellantis as a potential value investment, I warn you that this isn't just a bump in the road; it’s a massive downgrade that has slashed its adjusted operating income margin for FY24 from over 10% to as low as 5.5%. This is a near 40% downgrade in expected profits​, which came suddenly and aggressively. Such a drastic reduction is unheard of outside of recessionary periods and underscores deep-seated issues. In my view, investors cannot overlook such a sharp margin collapse, as it signals systemic, rather than cyclical, problems in Stellantis’ business operations. For me Stellantis is a clear "Strong Sell", and I wouldn't touch this stock with a 10 foot pole.

Notably, Stellantis shares are now down about 43% for the year, while the S&P 500 (SP500) is up 21%, and competitor General Motors (GM) is up 27%, respectively.

A Disastrous Profit Warning in 2024 ...

Stellantis' latest profit warning is a stark admission of how badly things have unraveled for the company. Notably, management is slashing its FY24 adjusted operating income margin forecast from "over 10%" to a dismal 5.5%-7%. On that note, I point out that H2 margins are likely barely above break even, after a close to 10% margin in H1. This is no small slip-up. Stellantis has had to ramp up inventory cuts, chopping an additional 200,000 units in the second half of 2024. For a company that prided itself on efficient inventory management, this is an embarrassing setback. The hit to free cash flow is even more shocking—Stellantis is now guiding for a cash outflow between €5 billion and €10 billion​. That’s a jaw-dropping reversal from earlier expectations of a positive cash flow, and it casts serious doubt on the company's ability to maintain its capital allocation plans. Personally, I wouldn't be surprised seeing Stellantis cutting the FY 2025 dividend by >70% vs. FY 2024.

There are a few drivers to this horrible profit warning: Firstly, Stellantis is ramping up efforts to reduce its bloated inventories in the U.S., which has triggered costly incentives and production cuts that have gutted margins. At the same time, North America isn’t the only region where Stellantis is in trouble. While the U.S. has dominated headlines, the situation in Europe is also concerning. Volume declines are hitting hard across the board. Stellantis had been banking on its electrification strategy and new product rollouts to carry it through a challenging market, but these moves now appear grossly insufficient. The company has seen significant shipment downgrades not just in the U.S., but also in Europe and other markets​. Thus, this widespread weakness suggests that Stellantis is struggling with far more than just a North American hiccup.

Stellantis has long "advertised" its ability to manage costs and drive synergies, especially in the wake of the PSA-FCA merger. But given the recent profit warning, investors are - and should be - left wondering whether the company has overpromised and underdelivered on its restructuring plans.

... Coupled With A Bleak Outlook for 2025

With the magnitude of the FY24 warning, the outlook for 2025 is bleak. Even if Stellantis manages to stabilize its North American operations, the company faces a prolonged recovery period. Analysts have already cut their AOI margin estimates for 2025, with a 30% downside risk being floated​ (Source Refinitiv, consensus estimates). Indeed, EBIT estimates for FY 2025 are now at about $12 billion, compared to $23 billion estimated two quarters ago.

Although Stellantis' management was hoping to bounce back quickly after H1 reporting, those hopes now seem fanciful. The company’s vaunted product pipeline, once a source of optimism, no longer looks like a game changer.

CEO Tavares Under Fire

One of the biggest casualties of this crisis could be Stellantis CEO Carlos Tavares, in my view. Historically, Tavares has been regarded as a sharp operator with a knack for turning around troubled automakers. But Tavares’ reputation is now under threat. Investors, myself included, are starting to question whether he can right the ship before his term ends in 2026​, following the exit of CFO and NAM COO. While I would welcome Tavares exit - after his horrible performance - I would be concerned about a potential management shake up, which would undoubtedly add additional uncertainty to the picture.

While we are addressing Stellantis management concerns, I point out that Stellantis reporting appears to be somewhat challenging to navigate as compared to competitors' reporting - with Stellantis being one of the few public listed companies that chooses to not report to its investors quarterly cash flow and margin data; with Stellantis reporting these insights only at H1 and H2. Moreover, I feel that management has a tendency to release vague and insufficiently detailed explanations for significant financial shifts (my personal opinion). For instance, in its 2024 profit warning, Stellantis provided broad reasons such as "remediation actions on North American performance issues" and "temporarily elevated working capital" without elaborating on how these factors specifically led to a projected cash flow swing from positive to a negative range of €5-10 billion​. Additionally, Stellantis bundles various financial impacts together, such as grouping operational issues in North America with global demand challenges, which muddies the picture and makes it hard for investors to assess the true underlying problems. The absence of granular, forward-looking data, particularly around revenue and cash flow projections, adds another layer of difficulty for analysts.

Lastly, I point out that Stellantis' past M&A activities don't help making financial analysis easier: Through the PSA and FCA merger, Stellantis has created a complex web of financial integrations that blend different accounting practices and reporting structures. This makes it somewhat difficult to assess the company's actual operational efficiency and the success (or failure) of the merger. The company frequently touts synergies and cost savings from these M&A activities, but the lack of detailed reporting on how these synergies are being realized adds to my confusion. Additionally, the adjustments related to restructuring costs, goodwill amortization, and non-recurring expenses complicate the financial picture, making it difficult for stakeholders to separate one-off M&A-related impacts from the core operational performance​.

Upside Risks

While I am very bearish on Stellantis, I acknowledge that the auto giant still has an enormous revenue base. If the macro backdrop improves aggressively, or Stellantis manages to cut more layers of costs, Free Cash Flow upside could swing to levels seen in 2023. This could resurface a value thesis for this struggling automaker. Moreover, Stellantis' dividend cut is far from certain as the company has plenty of cash on the balance sheet (some of which is working capital used in industrial business, however).

Final Thoughts

For all its past "success", Stellantis now faces a grim reality. The company's U.S. inventory issues have spiraled out of control, dragging down earnings and cash flow. Meanwhile, the Stellantis' European operations are also faltering. Investors, already disillusioned, should be skeptic towards this company, that seems to be lurching from one crisis to the next. On that note, Stellantis' issues look structural and systemic, not merely cyclical. The magnitude of the profit warning, combined with weakening demand, cash flow problems, likely incoming dividend cut, and a management team under fire, all make challenges impossible to dismiss. In my view, Stellantis stock is a "Strong Sell". And until cash flow for the company stabilizes over at least 2 years, I reject any attempt to assign a valuation/ target price.